Global Market Overview

Last updated: April 29, 2013 9:39 pm

Market mood lifted by Italian coalition

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Monday 21.30 BST. An important week for the markets started positively for equities, commodities and the euro, with optimism about the outlook for the eurozone buoyed by the formation of a new government in Italy.

The move, which ended two months of political stalemate, helped push the country’s borrowing costs to their lowest levels since late 2010 at a €6bn debt auction in Rome.

Riccardo Barbieri, chief European economist at Mizuho International, noted that Italy’s new finance minister, Fabrizio Saccomanni, was an independent and former deputy governor of the Bank of Italy.

“This represents a strong signal that, while pursuing a pro-growth policy agenda, the new government will not depart from fiscal consolidation and will not revise up its deficit targets for the coming years,” Mr Barbieri said.

But others warned that the road ahead would prove difficult.

“A fragmented parliament and a government coalition backed by rival parties until yesterday leaves some uncertainty on how the urgent economic and institutional reforms Italy needs will be tackled,” said Loredana Federico, economist at UniCredit.

The markets, however, appeared optimistic.

Italy’s 10-year government bond yield fell 15 basis points to 3.92 per cent, while the FTSE MIB equity index jumped 2.2 per cent – easily outperforming most of its European and US counterparts.

In New York, the S&P 500 rose 0.7 per cent to a fresh record closing high, while the FTSE Eurofirst 300 index rose 0.5 per cent. Japan’s stock market was closed for a holiday.

Underpinning those gains were expectations that the world’s central banks would maintain their ultra-accommodative policy stances.

More clues on this might come when the Federal Reserve concludes a two-day meeting tomorrow and the European Central Bank gathers on Thursday.

Jim Reid, macro strategist at Deutsche Bank, said
concerns about an early “tapering” of Fed asset
purchases had eased considerably.

“Indeed, our US rates strategist noted that the tenor of ‘Fed talk’ has recently shifted away from the topic of downshifting monthly asset purchases into an incipient debate about the thresholds for when to expand the QE purchases,” he said.

Meanwhile, there were widespread expectations that the ECB would announce a cut in interest rates, particularly given recent concerns about the German economy. This view was reinforced by news of a second successive fall in the EC economic sentiment indicator in April.

But Carsten Brzeski, senior economist at ING, sounded a note of caution.

“First of all, it is an open secret that the ECB itself considers a rate cut rather ineffective and mainly symbolic,” he said.

“Moreover, the ECB’s current main focus is the malfunctioning [policy] transmission mechanism.

“As long as this mechanism is not working, a rate cut would simply go up in smoke and could soon look like a last act of desperation.”

In spite of the eurozone rate expectations, the euro rose above $1.31 to its highest level against the dollar in a week.

The US currency staged a broad retreat, with the dollar index down 0.3 per cent, which helped support gold as it continued to recover from a recent sharp sell-off. The yellow metal was up
0.7 per cent at $1,473 an ounce.

Industrial commodities also pushed higher, with Brent oil rising 65 cents to settle at $103.81 a barrel and copper gaining 1.8 per cent to $7,153.50 a tonne.

In spite of the better tone of “riskier” assets, core government bond prices held up. The yield on the German Bund fell 1bp to 1.20 per cent and that on the 10-year US Treasury was flat at 1.67 per cent.

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